Did You Know...

A Mortgage Broker works for you, the client, whereas Bank Specialists are employed by the financial institution.

My Penalty is What? And what on earth is an IRD?

If you're thinking about refinancing your mortgage any time soon, those three letters might pose a bit of a problem -- or at least make a significant dent in your wallet.

When refinancing, lenders require you to pay a fee to get out of your existing mortgage. This fee allows them to redeem a portion of the money they're going to lose by allowing you to break your mortgage before the previously agreed-upon term. This is typically equivalent to three months interest or the interest rate differential (IRD), whichever is greater.

The IRD is the difference between the interest rate you agreed to pay the lender at the beginning of your term, and the rate at which they can lend that money out now. Before interest rates hit historic lows, homeowners typically never had to pay the IRD, because three months' interest was always greater than the differential between mortgage rates. Boy, has that changed.

The calculations can get tricky, as Patricia Lovett-Reid, VP of TD Waterhouse Canada, reveals in this article. In it, she offers the example of an individual who would like to refinance $100,000 outstanding on a locked-in fixed rate mortgage at 6% interest. With 45 months left on the term, the individual wants to refinance at 4.4%.

With savings standing at 1.6%, Lovett-Reid calculates that three months' interest would equate to $1,500 and the IRD would be $6,000 -- so, taking the higher of the two, the lender would charge a $6,000 penalty for the individual to get out of the mortgage.

If the individual chose to lock into a four year term, financing the new sum -- $106,000 -- at 4.4%, the savings would only be $5,176. Definitely not worth the time and hassle of the refinance.

Still confused? Don't be. Pop by my office or give me a call if you're thinking about refinancing -- I'll be happy to help!

Axiom Mortgage, June 2009

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At Greenwood Estates and Mortgage Company, Mission, BC, we represent dozens of lenders and loan programs across Canada. With our experience in banking and finance we can help you find the best rates for your needs. Many years working in the banking and finance industry has given us a great network of contacts that we can use to find the best product for you. Mortgages, business loans, refinancing, credit lines and debt consolidation are our business.

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